Overview: US threats to
break-up Facebook and the stalled stimulus talks spurred profit-taking in US
shares yesterday is dampening enthusiasm today. The MSCI Asia Pacific
Index fell for the third time this week, and Europe's Dow Jones Stoxx 600 is
little changed. US shares are trading with a firmer bias now. Ahead
of the ECB meeting, new record lows in yields are being seen in Europe, and
Italy's 5-year yield turned negative for the first time yesterday. Spain
auctioned 10-year bonds today with a negative yield for the first time, and
some buyers at the three-month bill auction in Australia also will receive a
negative yield for the first time. The US 10-year benchmark is hovering around
0.92%. The dollar is weaker against most of the major currencies.
The two notable exceptions are the yen and sterling. The Antipodean
currencies are leading today's move against the greenback. Emerging
market currencies are more mixed, with eastern and central Europe doing
best. The JP Morgan Emerging Market Currency Index is a little weaker for
what could be the second consecutive losing session. Gold remains on the
defensive after falling by more than $30 an ounce yesterday, unable to rise
above $1845, and pinned near the lows (around $1830). Crude oil, on the
other hand, shrugged off a 15 mln barrel surge in US inventories, the most in
eight months, and February WTI is hovering just below $46 a barrel
Asia Pacific
China is retaliating against the US by
sanctioning diplomatic passports, revoking visa-free travel to Hong Kong and
Macau. Starting
tomorrow, it will also begin collecting extra duties on Australian wine, on top
of the temporary anti-dumping duties announced last month. Australia,
and to a less extent, Canada are being punished by China for essentially being
US allies.
Japan reported producer prices were flat
in November and off 2.2% year-over-year. Producer prices have not been
positive in Japan since February. They rose by 0.9% in December 2019 and
1.4% in December 2018. Separately, note that divergence in estimates for
growth. The government is optimistic that with the latest stimulus
efforts, the economy can grow by more than 3% in the next fiscal year that
begins April 1. Most private forecasts are for around 1%.
Lastly, we note that the weekly MOF portfolio flow data shows Japanese
investors have stepped up their purchases of foreign bonds. Last week was
the fourth week of the past five that more than JPY1 trillion of foreign bonds
were bought. The five-week average of nearly JPY1.2 trillion is the
highest since early March, which itself was a four-year high.
The dollar reached a six-day high against
the Japanese yen just below JPY104.60 in late Asian turnover. Initial
support is seen in the JPYY104.20-JPY104.30 area. An option for about
$655 mln at JPY104.90 may stand in the way of a test on JPY105, though the high
for the past two weeks was about JPY104.75. The Australian stock
market snapped a seven-day advance, and the 10-year yield fell back below 1%,
but the Australian dollar is making new highs and drawing closer to $0.7500,
where a A$572 mln option is struck that expires today. The Aussie
settled at $0.7425 last week, and this would be the sixth consecutive weekly
advance. Initial support is now seen near $0.7450. The PBOC
set the dollar's reference rate at CNY6.5476, in line with expectations.
The dollar is a little firmer against the offshore yuan, dipping below CNH6.50
briefly, yesterday, while the greenback is a little softer against the onshore
yuan.
Europe
Some modest profit-taking was seen ahead
of the ECB meeting, and a five-day low was recorded yesterday. Still, the
euro remains above the upper end of the $1.1600-$1.2000 range that dominated
from mid-July through the end of November. The focus is
squarely on today's ECB meeting, where the market feels fairly confident about
the outcome. The ECB will extend and expand its emergency bond-buying
program (PEPP). It is also widely expected to announce a new targeted
longer-term refinancing operation (three-year loans at attractive rates). It
could tweak some other settings, but the focus will be on the size of the
increase in PEPP resources and how long it is extended beyond the middle of next
year. Most are looking for around a 500 bln euro increase and the
program's extension until the end of next year. The risk is
asymmetrically in favor of more for longer.
The ECB staff will update their forecasts,
and ideally, provide the backdrop for the policy changes. The action,
which was pre-committed to, must be because the situation has deteriorated more
or quicker than expected. The emphasis is on the near-term risks that are
materializing, not on the potential upside risks next year when the vaccine is
available. The foreign exchange market will be sensitive to any comments,
or indeed, lack thereof, about the euro. Besides the truism that the
exchange rate feeds into the models of the economy and inflation, there is
little that Lagarde will likely say. She will be prepared to be peppered
with comments, but she is likely to give little away, if for no other reason
than there is little to say. The ECB, like the Federal Reserve, does not
currency policy per se. That said, ideally, the real broad exchange rate
moves in the direction of policy. Otherwise, official efforts are
diluted.
The dinner for UK Prime Minister Johnson
and EC President von der Leyen failed to resolve the dispute, but the outcome
was to extend talks through the weekend. The same
three vexing issues remain; fishing rights, governance, fair competition, or
"level playing field." The EU has shown remarkable
cohesion, and this appears to have also frustrated Johnson's strategy to try to
exploit potential fissures. German Chancellor Merkel, who appears to have
found a compromise with Poland and Hungary to get the EU budget and Recovery
Fund moving forward, took a hard line, warning that a dispute over what happens
if/when the UK rules diverge from the EU could also prevent an agreement.
Moreover, the UK's unilateral defection from the tariffs levied in retaliation
for Boeing's improper US subsidies further undermined trust, with some
officials seeing it as a betrayal.
The UK economy grew by 0.4% in October. While it is
better than expected, it shows a marked slowdown from 1.1% in September, and
with additional social restrictions, last month's GDP may have
contracted. Still, October was lifted by strong industrial output (1.3%
vs. 0.5% in September), but services and construction slowed markedly, and net
exports were a larger draw. The overall trade balance swung sharply back
into deficit (GBP1.74 bln) from a GBP613 mln surplus in September. It is
the first deficit since March.
The euro is trading in about a third of a
cent range above $1.2075 today. It is well inside yesterday's range. (~$1.2060-$1.2145) ahead of the ECB meeting. The initial risk seems to be
on the downside, and initial support is seen in the $1.2060-$1.2080 area.
There are a couple of expiring options to note. The first is for almost
690 mln euros at $1.2050 and the other is struck at $1.20 for about 570 mln
euros. Sterling, which reached almost $1.3540 at the end of last week,
is straddling the $1.33-area in the European morning. A break of
$1.3290 could spur a test on the week's low near $1.3225, and the $1.3200 area
corresponds to the halfway point of the rally from last month's low near
$1.2855. The euro has swung between about GBP0.8980 to around GBP0.9140
this week and is firm today near session highs around GBP0.9100.
America
The US Senate is expected to pass a
one-week continuing resolution, as the House has already done, to buy
negotiators an extra week to find a compromise on spending authorization and
new stimulus measures. The sticking points now are reportedly
shielding companies from Covid-related liability and aid to state and local
governments. A possible workaround on the liability issue will be formally
proposed by the bipartisan group today. Separately, the US reports weekly
initial jobless claims (many look for a rise) and November CPI. While the
headline and core rates may rise by 0.1% on the month, the year-over-year rates
may tick down to 1.1% and 1.5%, respectively, due to the base effect.
Many observers are playing up the risk of resurging inflation next year.
Most arguments seem to be based on 1) pent-up demand post-Covid, 2) rising
commodity prices, and 3) expansion of money supply. Of course, there are
some structural arguments, too, like shifting demographics and the weakening of
globalization.
The Bank of Canada stood pat yesterday, as
widely expected. Its bond-buying (C$4 bln a week) will continue
until the economic recovery is well underway. Its low-interest rate (0.25
bp) stance will remain until the economic slack is absorbed, and it is on a
sustainable path to its 2% inflation target. It does not see the latter
happening until 2023. The Bank of Canada did not address the exchange
rate much. It did recognize the rise in commodities and the broad-based
US dollar decline.
Mexico reported its first decline in
headline CPI since July. It stood at 3.33% in November, down from 4.09%
in October. The extended period of shopping discounts, a fall in food
prices and gasoline drove the decline. Core prices also fell.
Banxico meets next week, but the majority of the five-person board will likely
want to see if the decline in prices is transitory. Last month, the Deputy
Governor dissented in favor of a cut, while the other four voted to pause after
11 consecutive cuts. Brazil's central bank kept the Selic rate at
the record low 2% but seemed to caution that inflation expectations are
rising. This strengthens the view that Brazil is at the end of its easing
cycle.
The US dollar continues to consolidate its
recent losses against the Canadian dollar and remains trapped in the trough. It has
struggled to rise above CAD1.2830 this week and has found support near
CAD1.2770. The intraday technicals warn against playing for a sustained
break today. Similarly, the greenback is in an MXN19.70-MXN20.00
range. The entire range was explored yesterday, and today it is chopping
around the middle of the range around MXN19.85. It does not appear
to be going anywhere quickly.
Disclaimer
Reviewed by Marc Chandler
on
December 10, 2020
Rating:
